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Banks are Money, If You Know Where to Look

This space in the banking sector is having a strong second half.
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Banking has been one of the least-loved sectors this year, but is that about to change? The answer depends on the type of bank we're analyzing.  

According to the charts, not all banks are created equal. Let's look at the banking sector vs. the overall market, starting on July 1st, the start of the second half of the year. 

SPY vs. XLF vs. KRE via TradeStation

SPY vs. XLF vs. KRE via TradeStation

Using the S&P 500 as a benchmark (in green), we see the S&P Select Financial SPDR (XLF, in red) has slightly underperformed the overall market. The XLF ETF is loaded with big financial institutions like JPMorgan Chase (JPM) and Wells Fargo (WFC). 

However, the S&P Regional Bank SPDR (KRE, in blue), which contains names like KeyCorp (KEY) and PNC Financial (PNC), is taking off. Since July 1st, KRE has outperformed both the bigger banks and the overall market. 

KRE chart via TradeStation

KRE chart via TradeStation

KRE is currently breaking out of two bullish patterns - a double bottom, in blue, and an inverse head and shoulders, in black. On Friday, KRE closed at its highest level since June 9th. Based on this chart, I'm projecting KRE to the $50 area. 

Why are the regional banks outperforming the larger financial institutions? The housing market is roaring back to life, driven by a variety of factors. The resultant rush of mortgage underwriting is likely to have a greater impact on the earnings of smaller regional banks, compared to large financial institutions. 

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Ed Ponsi is the managing director of Barchetta Capital Management, and is the author of three books for publisher Wiley Finance. A dynamic public speaker, Ed has made appearances around the world, in such diverse locations as Singapore, Dubai, London, and New York. For more information about Ed and his work, click here